Longitudinal Reduces 62% of Affiliate Rate and Causes High Inventory Misallocation as a Core Problem

On the 4th floor of Isetan, Nanjing West Road, Shanghai, the location of the "LIME FLARE" (Rheinland, Langzi brand) store is not so conspicuous. The sign of "Langzi shares' first year of listing" and the popular movie star Su's photo, on the other side is a "20 percent off" sign.

There are high-end sweaters, dresses, trousers, and a few shoes. There are thousands of sweaters and the price of trousers is generally more than two thousand. The reporter stayed there for about half an hour and saw only a small number of people. The two clerk had nothing to do.

Langzi lowers 62% franchise rate to high inventory

This year's three quarterly report shows that in the first three quarters of the company's Longitudinal shares operating income of 872 million, an increase of 26.10%; net profit attributable to shareholders of listed companies of 208 million, an increase of 41.15%. In sharp contrast to this, inventory in the first three quarters increased by 66% from the beginning of the year to 445 million, and inventory in the third quarter increased by 39.78% from the end of the second quarter.

In fact, an important "culprit" in the high inventory of GLANCE is its franchise system. In the initial period of the development of Longitudinal, due to the need to use the geographical advantage of franchisees to enter the department store negotiations, so the proportion of joining a high, especially the main brand Langzi, joining accounted for 62%.

“This system is actually a mismatch for high-end brands. Low-end brands are generally market-oriented. Like Semir and Metersbonwe, high-end luxury goods are rarely joined. The franchise system will continue to impact the price system. Branding power will be a problem," a senior investor in Shanghai told reporters.

The first entrepreneurial R & D center researcher Lu Lihua also believes that compared to joining, direct operation is conducive to improving the terminal management level of the first-tier cities in Longitudinal, expanding single-store profitability, and can reduce the capital and inventory pressure of franchisees, and make Franchisees get higher than their previous operating income and fully mobilize their operating momentum.

Therefore, starting from 2012, the company shares a certain part of the Langzi brand with the Langzi brand. The store of some franchisees is owned by the company.

According to statistics, in the first half of this year, the company received 19 franchisee stores (14 in Wuxi and 5 in Henan) in the first and second-tier cities. In the future, it will also be transferred from the first-tier, second-tier and provincial capital cities to direct operations and new direct operations. The approach of the shop is to realize the goal of direct operation of all first-tier cities and second-tier cities and 80%-90% of the country's direct operations.

Increasing the proportion of direct operations not only improves management efficiency, reduces costs, but also increases sales margins. In the second quarter of 2012, the gross share of Longue shares reached 64.23%, an increase of 3.49 percentage points from the first quarter.

However, this also brings side effects - inventory pressure.

The stocks that were pressed on the franchisees' channels have now all returned to the hands of the company, causing the company's stock to rise sharply. The data shows that in the first three quarters, the company's inventory increased by 66% compared with the beginning of the year, and inventory in the third quarter increased by 39.78% compared to the end of the second quarter.

Under the pressure of inventory, Langzi Group set up its 5th quarter business segment in the second half of 2011, responsible for OUTLETS discount stores and integrating some terminal stores. In 2011, Langzi integrated seven OUTLETS discount stores, adding 9 to 16 new stores in the first half of this year, followed by more than 10 to be integrated. The company plans to complete the integration of all OUTLETS within this year.

However, discount stores have also brought about a drop in gross profit while digesting inventory. According to the data, after gross profit rose to 64.23% in the second quarter, gross profit dropped 2.68 percentage points in the third quarter, which is not much different from the gross profit of 60.74% in the first quarter. The gross profit advantage brought by joining the direct operation was consumed.

The first mismatch resulted in the second mismatch. This is the core issue of Langzi.